Oil hits $70 as ten­sions deepen fear of dis­rup­tion

Muscat Daily - - FRONT PAGE -

Lon­don, UK – Oil on Mon­day ex­tended its dra­matic surge, sur­pass­ing US$70 a bar­rel in Lon­don for the first time since Septem­ber, as Mid­dle East ten­sions flared af­ter the US as­sas­si­nated one of Iran’s most pow­er­ful gen­er­als.

Oil fu­tures jumped by an­other 1.4 per cent on Mon­day as the US State Depart­ment warned of a ‘height­ened risk’ of mis­sile at­tacks near mil­i­tary bases and en­ergy fa­cil­i­ties in Saudi Ara­bia. US Pres­i­dent Don­ald Trump re­it­er­ated threats of re­tal­i­a­tion should Iran ‘ do any­thing’ and vowed heavy sanc­tions against Iraq if Amer­i­can troops are forced to leave OPEC’s sec­ond-big­gest pro­ducer.

The clash is fan­ning fears that a wider con­flict could dis­rupt sup­ply from the re­gion, which pro­vides al­most a third of the world’s oil. Prices haven’t hit these lev­els since an at­tack on Saudi Ara­bia’s pro­duc­tion fa­cil­i­ties in Septem­ber - which the US blamed on Iran - briefly halted about 5 per cent of global out­put.

“Crude has some more risk pric­ing to do,” said Bob McNally, pres­i­dent of Rap­i­dan En­ergy Group in Bethesda, Mary­land, and for­mer White House oil of­fi­cial un­der pres­i­dent Ge­orge W Bush. “We are go­ing to grind through the US$70s up to­wards US$80 Brent as Iran cal­i­brates and ex­e­cutes its re­tal­i­a­tion.”

Brent fu­tures rose as much as US$2.14, or 3.1 per cent, to US$70.74 on ICE Fu­tures Europe and were at US$69.55 at 10:32am in Lon­don. The con­tract surged 3.6 per cent on Fri­day. West Texas In­ter­me­di­ate ad­vanced 1.2 per cent to US$63.78 on the New York Mer­can­tile Ex­change.

The po­lit­i­cal ten­sion is buf­fet­ing a mar­ket that had al­ready been tight­en­ing, in large part be­cause of pro­duc­tion cuts by the OPEC car­tel and its al­lies. The pre­mium for im­me­di­ate Brent fu­tures com­pared with those seven months ahead more than dou­bled in the fourth quar­ter.

Saudi Ara­bia, Iran and Iraq to­gether pumped more than 16mn bar­rels of oil a day last month. Most of their ex­ports leave the Ara­bian Gulf through the Strait of Hor­muz, a nar­row wa­ter­way that Iran has re­peat­edly threat­ened to shut down if there’s a war.

The US said there’s a risk of at­tacks par­tic­u­larly in the east­ern prov­ince of Saudi Ara­bia and near the Ye­meni bor­der, close to mil­i­tary bases as well as oil and gas fa­cil­i­ties, the State Depart­ment said in a tweet. The Pres­i­dent is also send­ing more troops to the Mid­dle East.

Rising ten­sions be­tween the US and Iran have al­ready caused con­sid­er­able tur­bu­lence in oil mar­kets, but so far it’s been short-lived. Last year, Wash­ing­ton blamed Tehran for sab­o­tage at­tacks on su­per­tankers and a mis­sile and drone at­tack on Saudi Ara­bia’s Abqaiq crude-pro­cess­ing plant in Septem­ber - the largest sin­gle sup­ply halt in the in­dus­try’s his­tory. Iran de­nied in­volve­ment.

Beyond crude’s rise, there were other sig­nals in the mar­ket that peo­ple were prepar­ing for fur­ther dis­rup­tion. Volatil­ity has risen to its high­est level in a month and the cost of de­riv­a­tives that in­sure against price spikes in­creased. Four mil­lion bar­rels of op­tions con­tracts that would profit from a jump in Brent crude to US$95 a bar­rel traded for both March and Septem­ber. The cost of in­sur­ing tankers could rise again, af­ter it surged in the wake of the Abqaiq at­tack in Septem­ber.

Still, af­ter climb­ing 23 per cent last year oil prices may have al­ready reached lev­els that don’t leave much scope for fur­ther gains. Goldman Sachs Group Inc said an ac­tual dis­rup­tion to global sup­plies is needed to keep prices at cur­rent lev­els.

“The oil mar­ket al­ways as­sumes the worst, so a lot of the gen­eral risk is al­ready priced in,” said Jaa­far Al­taie, man­ag­ing di­rec­tor of Abu Dhabi-based con­sul­tant Manaar Group. “Prices at US$70 a bar­rel al­ready as­sume the worst-case scenario and we see them hold­ing there.”

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